Big problems for small biz borrowing

John Robertson, owner of The Sexy Salad in Hauppauge, did exactly what many well-run businesses do. He ploughed profits back into his company, buying equipment and expanding his office.

Although he had a credit line, the problem came when he sought to borrow to buy a second site. His bank said the absence of a paper profit made it harder to lend.

“I doubled my size. I put in a new dining room. I got another vehicle and put in a beautiful chrome grill, got a new refrigerator and salad case,” Robertson said. “The bank didn’t look at it that way.”

Now that the economy is improving, small companies often are seeking to expand and meet demand. Even if they’re getting back in a borrowing mood as they seek

to grow, they’re often finding bigger obstacles than they anticipated.

Startups, fuhgeddaboudit. They have little hope of traditional bank loans, which typically require firms to have at least two-year track records. Liabilities can make banks skittish, even if they’re part of business as usual.

Then there’s a big catch 22 for many small firms. Uncle Sam says you can lower profits – and any taxes – by investing in the business and taking payouts. But Uncle Banker often wants to see a paper profit.

“That’s one thing we encounter frequently,” said Michael Spolarich, Islandia-based Empire National Bank’s chief credit officer. “The company on their tax returns doesn’t demonstrate the ability to pay the loan from cash flow.”

Although some companies retain earnings, many reinvest, ending each year as a zero-sum game. Banks then balk at loans.

“If you’re showing losses on paper, regardless of where the money’s going, that might be a problem in terms of being able to get credit,” said Ron Coccaro, New York and Connecticut business banking area manager for San Francisco-based Wells Fargo.

“They have to show that they’ve been profitable for the last two or three years,” Hill said. “A lot of small businesses just want to show they’re breaking even.”

The buck stops here

Although demand is picking up, that doesn’t mean obtaining money’s getting easier. The memory of a meltdown may still affect bankers’ decisions.

“The banks after the last crisis in 2008 and 2009 aren’t looking to get burnt,” said Mark Meinberg, partner in charge of private business services in EisnerAmper’s Syosset office. “It’s a lot harder to lend to someone smaller when you can lend to a larger company. Banks look at the cost of servicing the loan.”

About 34 percent of businesses surveyed in the Wells Fargo/Gallup Small Business Index released in February said obtaining credit is easy, up from 28 percent a year ago. That still means two-thirds have trouble.

“Many small businesses don’t know their way around the borrowing process,” Hill said. “They don’t know how to put the documentation together. The documentation requirements have changed; [banks] want to see more than just a P&L statement.”

Even if businesses’ books show they are profitable, that doesn’t mean the bank will believe it. Banks want proof that the numbers are real.

“You have to have an accountant and an attorney, and many small businesses skimp on those costs,” said Corrinne Graham, principal of Graham International Consulting and Research in Yaphank. “There are a lot of resources out there, but it’s a challenge for small businesses to find these resources.”

Spolarich said banks typically like to see books handled on an accrual rather than a cash basis, a technicality that can get in the way of a loan. Banks also don’t like to see businesses that owe too much, even though debt may be the nature of their business.

“If the balance sheet is leveraged – if there’s a lot of debt relative to equity – that can be a problem,” Spolarich said. “It could be trade payable to supplier.”

Banks often want your money in the form of deposits before they give you theirs. Lake Success-based Astoria Bank has been growing business lending and deposits, providing cash management services and consulting.

“You want that full, rounded relationship,” said Stephen Sipola, executive vice president and managing director of Astoria’s business banking group. “The more we do with them, the tighter that relationship becomes.”

Riding the roller coaster

While banks often look for companies that excel on paper, companies exist in a world that is anything but abstract. One bad year can burn a hole in an application.

“Small businesses, especially those in retail, don’t see three years of profitability because they’re so up and down,” said Roslyn Goldmacher, president and CEO of Westbury-based Long Island Development Corp. “Conventional lenders like to see a consistent trend of rising sales and profitability.”

The ghost of Hurricane Sandy still haunts many applications. Companies may be doing well today, but still recovering from tough times.

“Those small businesses affected by Hurricane Sandy’s numbers may reflect that in 2012 and even into 2013, so in two of the last three years they’re going to have a problem,” Goldmacher said. “They simply don’t have a track record with the lender.”

Bankers say businesses may be doing better, but balance sheets still often show signs of a few difficult years.

“Most banks are looking for relatively good credit,” Sipola said. “The recovery has happened, but it hasn’t been completely reflected in clients’ financial statements.”

Better borrowing days ahead

Businesses with borrowing relationships may face their own problems. They simply don’t play the financial field.

“Many companies are afraid to change banks, go to a different lender,” said Eric Altstadter, partner in charge of EisnerAmper’s Syosset office. “If they’ve been with a bank for 10 years and have a hiccup, the bank understands them.”

Even if borrowing remains tough, the Wells Fargo/Gallup Small Business Index shows things are getting better. That poll’s index score, measuring small business owner optimism, rose to 71 in January from 45 a year ago.

About 49 percent of small business owners reported revenues increased over the past 12 months, up from 37 percent a year ago and the highest since 2007, when 52 percent reported rising revenues. And many local companies say things look bright.

The Sexy Salad is on a roll, pun intended. Robertson has a line of credit and thinks, in retrospect, buying that second site might have been a bad idea. But he wishes the bank asked questions earlier, rather than sounding so bullish on expansion.

“They yessed me to death,” Robertson said of early interactions. “They could have asked me for taxes, how it’s being structured.”

Goldmacher said as the economy recovers, so will borrowing. More firms are getting on a firm financial footing, from both their own and banks’ perspective.

“Borrow when you don’t need it to establish a track record of paying back the loan,” Goldmacher advised. “Keep your personal and business credit in good shape. Don’t always look to get out of taxes. Show profits.”

4 comments

Its practically impossible to get financing at this point. The banks borrow at 0% from the people and only lend it back if it is a guaranteed win. How are businesses supposed to grow with zero access to capital? In a perfect world we cut out the middleman and borrow direct from the peoples coffers at a lower interest rate than what the banks are lending at.

I’m sorry but this story is all from the viewpoint of the bank who wants people to borrow money so that they can make money from the interest. While it is OK to borrow when needed it SHOULD NOT be a requirement of any reasonable financial institution when evaluating a business loan. A Company is in business to make money for its owners or its shareholders NOT the bank. The bank provides a service that is only useful to a business when it is needed to expand or a refit that they do not have the cash reserves for. If everyone used the argument set forth in this article then a construction company would not build for you if you didn’t have a continuous building program for the construction company to say that you are a viable business and that they are willing to take a risk on you again with another building project. The banks provide a service that they get paid for that they competed to get just like every other business does.

Even though it’s a somewhat unknown (and often feared) industry, alternative lenders help a ton of businesses in these predicaments and can be a huge boon. The OnDecks, Rapid Advances, and ProMEDs (if you’re a medical business) of the world are typically a solid option when banks tighten their purse straps.

The onus is on the owner to search for, and properly examine, potential options when one avenue closes. When it comes to financing, there’s a ton out there.

The SBA has a program dedicated to small business borrowers that have issues with meeting current banking criteria for loans. The 7a program is supported by a number of banks throughout the region and also by banks entering the area from other parts of the country. 7a loans are aimed at small-business owners with less established credit histories or less cash flow to qualify for general bank financing. It might require personal collateral support but provides the SBA’s guaranty for a lender to stretch its criteria for a reasonable loan request. There are Small Business Development Centers on the island with trained staff to assist in finding a lender and offering training on packaging a loan request.

About the Author

Claude Solnik covers healthcare, finance, and technology/energy for Long Island Business News.